Description

Question:

Assume that you are the project manager at Textron Aviation (TXT). Textron Aviation products include corporate and business, personal, and military aircraft. For purposes of this discussion, you have knowledge that in recent years most of Textron Aviation’s military products have, where possible, been outfitted with Winglets. Further, the design of these wing components has evolved to make them more efficient and maximize the fuel savings they provide. Textron Aviation flight operations manager reports finding that the addition of Winglets to an existing aircraft offers fuel savings of approximately 3% of the gas bill, or 150,000 gallons of jet fuel per year (Aviation Partners, Inc., n.d.). At a cost of $1.06 per gallon (which for simplicity, we will assume to be stable), this is a significant source of cost-reduction which accrues to the end user over the useful life of an aircraft. While the useful life of the corporate craft is 30 years, Textron’s research indicates that clients typically use a 10-year planning horizon, at most.

Answer:

Part A

Since saving is 150,000 gallons of fuel will be saved and cost per gallon is $1.06 so per year saving would be 159,000.

These savings are in future value so in order to get saving in present value, we have to discount it with 15% (given)

All future values are discounted and sum of all value comes out to be 797,984

So potential cost saving will be 797,984 over the period of 10 years

Part B

the potential financial benefit to Textron of adding winglets

= Additional revenue they can charge ( total cost saving by user) – Cost of winglets

= 797,984 – 556,000

= 241,984

Part C)

Concerns we have to look for

Resources that we will be using for this project is less valuable elsewhere ( means getting return lower than return from this project)

We are getting the return of 26% but we are not considering other factors like whether production process will change the cost.

Change of fuel price will impact the saving so will additional revenue due to winglet

Part D)

As of now our NPV is positive and it is

= 797,984 – 556,000 = 241,984

In order to make our NPV zero, we need to find the discount factor that makes NPV zero